Article

How to Achieve Optimal Inventory Levels with SAP Integrated Business Planning for Inventory

by Anjali Butley, Solution Architect, Tata Consultancy Services

April 2, 2018

Learn how to achieve optimal inventory levels for raw materials, work in process, and finished products across the supply chain with SAP Integrated Business Planning.

(To learn more about SAP Integrated Business Planning, attend SAPinsider's SAP IBP Bootcamp, which will be held April 17-19, 2018, in Copehhagen. For information about this bootcamp and to register, click here. To learn about how to optimize SCM processes with SAP software, attend SAPinsider's SCM Optimization Bootcamp, which will be held May 7-9, 2018, in New Orleans. For more information about this bootcamp, click here.)

Effective inventory management of various inventory types, including finished goods, work in process (WIP), raw materials, and partners’ (suppliers’) inventories leads to core supply chain management optimization. Today, most of the companies facing challenges for inventory optimization want to review and improve on it by having it be a part of the sales and operations planning (S&OP) process. Now the S&OP will have inventory review as an additional process step.

The S&OP process generally starts with a demand review followed by a supply review and pre-S&OP review, and ends with an executive review. From the organization’s strategic plan, one of the requirements is including an inventory review business process step in the S&OP process. Now the S&OP with inventory review process has the following sequence, shown in Figure 1:

Figure 1

S&OP process with inventory review

Demand review: Demand planners from various regions review global demand and reach a consensus on a demand plan.

SAP Integrated Business Planning enables an organization to overcome the key supply chain challenge of how to effectively handle optimal inventory levels for finished products and raw materials. The business process of S&OP along with inventory, which is also referred to as sales, inventory, and operations planning (SiOP), helps an organization overcome the challenge of inventory levels.

SAP Integrated Business Planning is an SAP HANA- and cloud-based business suite. It has a set of various applications based on supply chain business processes. For example, the SAP Integrated Business Planning for demand application is used for demand planning business processes; SAP Integrated Business Planning for inventory is used for inventory planning; the SAP Integrated Business Planning for sales and operations planning application is used for S&OP planning; and the SAP Integrated Business Planning for response and supply application is used for supply and response allocation business processes. SAP Integrated Business Planning also includes the SAP Supply Chain Control Tower, which is used for business performance management and key performance indicator (KPI) monitoring. These applications can integrated with each other.

SAP has provided standard planning models for each application that can be later copied and modified in accordance with an organization’s business requirements. SAP has provided one unified, standard planning model for end-to-end integrated planning processes that covers demand planning, inventory planning, response and supply, S&OP, and a control tower.

I cover the steps for setting up the business solution to get the maximum results using a unified planning model to avoid using multiple planning applications and then integrating them with each other. In my case, I would have been required to use two applications, such as SAP Integrated Business Planning for sales and operations and SAP Integrated Business Planning for inventory. Instead, I use a copy of a unified planning model of SAP Integrated Business Planning that has a unified planning area (SAPIBP1). SAP has recommended using an integrated planning area when implementing multiple applications to allow integrated planning.

The advantage of using a unified planning area is to allow work on integrated planning processes such as:

Demand planning

Demand sensing

Inventory optimization

Supply planning

S&OP

Supply chain performance monitoring

For my example, I use two processes: inventory optimization and S&OP.

High-Level S&OP Inventory Review Process

In an overall S&OP process, an inventory review is done after a demand review. The inventory review process includes data validation of various inputs from the demand, supply, and production side by the global inventory planner at a global level and by the local inventory planner at the local location level. The global and local inventory planners reach a consensus to finalize the inventory plan.

An inventory optimization run is executed after the inventory planner validates the data input based on the supply chain network. Various types of inventory levels are involved during the inventory optimization. These inventory levels are:

Safety stock and target safety stocks

Inventory holding cost

Batch size and batch size variability

Transportation lead time and transportation error variability

Forecast, forecast errors, and forecast error variability

These inventory levels are used as an input for various types of inventory optimization algorithms that are available in SAP Integrated Business Planning. Select an algorithm as per the business requirement. Analyze the inventory optimization run output results at the global and local levels. Simulate the inventory optimization with different parameters of safety stock levels. Validate the simulation scenario and then finalize the inventory plan (Figure 2).

Figure 2

S&OP inventory review process

Setting Up an SAP Integrated Business Planning Model for S&OP with Inventory Review

In this section I explain how to set up the SAP Integrated Business Planning model for S&OP with inventory review. Setting up a model to get the best benefit of the SAP Integrated Business Planning application is a major task. Before setting up a model spend time reviewing the business requirements and the supply chain network.Figure 3 shows the supply chain network of one organization whose name is LA. The LA organization has a manufacturing plant named LA Plant; distribution channels LA_DC1, LA_DC_2, and LA_DC3; products LA_PRD1, LA_PRD2, and LA_PRD3; components LA_Comp1 and LA_Comp2; suppliers LA_Supp1 and LA_Supp2; and customers LA_Customer1, LA_Customer2, LA_Customer3.

Figure 3

The supply chain network of organization LA

Based on my supply chain network and business requirements, I have set up a planning model that has a planning area named UPA, which consists of master data, key figures, and a time profile. Planning area UPA is a copy of SAP Integrated Business Planning standard unified planning area SAPIBP1. Here I have used the fit-to-standard concept of SAP related to next-generation products.

First, utilize the SAP Integrated Business Planning best practice process flow to leverage the configured system and delivered data for demonstration. Then discuss how the process fits with your organization’s requirements. Identify requirements and the necessary configuration and map the business solution. In my example, I have started discussing how the process fits with the organization’s requirements.

To access planning area UPA, log on to the Web user interface (UI) of SAP Integrated Business Planning with a valid user ID and password. The ID and password would be provided with the required role and authorizations by an SAP Integrated Business Planning administrator.

After the successful login, launch the home page that lists SAP Fiori app tiles. The home page also includes a Model Configuration section that lists tiles for model configuration (Figure 4). Model configuration is the main backbone step to define the structure of data and calculation required for the planning process. How data is stored, calculated, and aggregated in the system is defined during the model configuration steps.

Figure 4

SAP Fiori app Model Configuration tiles

From the SAP Fiori app select the Master Data Types Model Configuration tile. The Model Configuration app appears on your screen. The top of this screen shows SAP Integrated Business Planning configuration, and a section in the middle of the screen shows a Configure Planning Area, which is the main screen for configuring the planning area. Click the Define Planning Area link (Figure 5).

Figure 5

The Configure Planning Area main screen

To set up a model based on the business requirements, follow these steps in sequence:

Define a model

Attributes

Master data types

Time profiles

Planning areas

Planning levels

Key figures

Planning operators

Activate the planning model

Activate the planning profile

Activate master data types

Activate the planning area

Load data

Time profile data

Master data

Key figure data

For my scenario, planning area UPA has a set of master data, a time profile, and key figure planning operator-related details that support the business process of S&OP with inventory review (Figure 6).

Figure 6

Planning area UPA

Table 1 lists the required master data for my scenario.

Master data

Value

Customer

LA_Customer 1 LA_Customer 2

LA_Customer 3

Customer Group

North, South, East, West

Location

LA_Plant, LA_DC1, LA_DC2, LA_DC3

Location From

LA_Plant

Product

LA_PRD1

LA_PRD2

LA_PRD3

Location Product

Location ID: LA_Plant Product:
LA_PRD1

LA_PRD2

LA_PRD3

Source Location

Ship-from location: LA_PLANT

Product ID: LA_PRD1

Source ID LA_Plant-PRD1

Component

LA_Comp1

LA_Comp2

Production Source Item

Product ID: LA_Plant_LA_Comp1

Source ID: LA1710_LA_PRD1

Table 1 List of master data

In my scenario, you need key figures for demand review, inventory review, supply review, pre-S&OP review, and executive review. Table 2 shows the key figures needed for the inventory review to use for the process execution of S&OP with inventory review for optimal inventory levels.

Key figures

Key figure usage

Demand Forecast

Input from the demand side for inventory optimization

Demand Forecast Error CV

Input from the demand side for inventory. (Note: CV stands for coefficient of variation, and it is used for calculating safety stock. Safety stock depends on the variability of a forecast error where forecasting is used.)

Target Service Level

Input for inventory optimization

Initial Inventory

Initial stock stock on hand, input for inventory optimization

Transportation Lead Time

Input for inventory optimization algorithm

Recommended Safety Stock

Output from inventory optimization algorithm

Recommended Safety Stock Value

Output from inventory optimization algorithm

Safety Stock Target (from IO)

Output from inventory optimization algorithm

Safety Stock Target Value (from IO)

Output from inventory optimization algorithm

Supply Variability Safety Stock

Output from inventory optimization algorithm

Final Safety Stock (from IO)

Output from inventory optimization algorithm

Alert for Safety Stock Delta

Output from inventory optimization algorithm

Cycle Stock (Target)

Output from inventory optimization algorithm

Merchandising Stock

Output from inventory optimization algorithm

Pipeline Stock (Target)

Output from inventory optimization algorithm

On Hand Stock (Target)

Output from inventory optimization algorithm

Target Inventory Position

Output from inventory optimization algorithm

Planned On Hand Stock (end of period)

Output from inventory optimization algorithm

Projected Stock

Output from inventory optimization algorithm

Pipeline Stock (Average)

Output from inventory optimization algorithm

On Hand Stock (Average)

Output from inventory optimization algorithm

Average Inventory Position

Output from inventory optimization algorithm

Table 2 List of key figures

The planning operator has various algorithms to calculate specific key figure data based on the planning operator type. The planning operator type indicates the functionality of the planning operator for the application. For example, planning operator type IO is related to inventory optimization, which has various algorithms.

As a part of setting up a planning model the next step is to assign the various planning operators to the planning area.

As per my business requirements I have assigned the planning operators to the planning area UPA as listed in Table 3.

SAP Integrated Business Planning - planning operator type

Name

Usage

IBPFORECAST

Statistical forecasting

Runs a statistical forecast for a selection of the data in the planning view

IO

Inventory optimization

Runs inventory optimization for a selection of the supply chain network. Has five algorithms:

Copy key figure values from a source key figure to target key figures in the same version of a planning area

ADVSIM

Advanced simulation

Allows you to do simulations of various operations

SNAPSHOT

Snapshot

Takes a snapshot of a predefined set of key figures in a batch process

KPI_PROFILE

Forecast error calculation

Sets up forecast error calculations for selected data in a planning view

Table 3 List of the planning operators assigned to planning area UPA

SAP Integrated Business Planning has provided five algorithms for inventory optimization. The inventory optimization planning operator allows algorithms to run inventory optimization for a selected supply chain network. Table 4 lists algorithms for inventory optimization and their use.

Inventory operator

Algorithm type

Parameter name in SAP Integrated Business Planning, add-in for Microsoft Excel

Usage

Single-Stage Inventory Optimization

SINGLE STAGE IO

Decomposed (single-stage) inventory optimization

The Single-Stage Inventory Optimization algorithm optimizes recommended safety stock locally. It is best for simulation runs to determine the impact on recommended safety stock of local changes.

Multi-Stage Inventory Optimization

MULTI STAGE IO

Global (multi-stage) inventory optimization

The Multi-Stage Inventory Optimization algorithm is used to optimize recommended safety stock globally across all products and locations of the supply chain. It minimizes total safety stock holding costs while ensuring that all customer service level targets are met.

Expected Demand Loss

LOST SALES IO

Expected lost demand

The Expected Demand Loss algorithm calculates the expected lost demand quantity under given inventory plans and demand distribution.

Forecast Error CV Calculator

FORECAST_ERROR

Calculate Forecast Error CV

The Forecast Error CV Calculator algorithm calculates the forecast error CV; that is, the difference between forecast and actual demand. Forecast error is a statistical measure of forecast accuracy used to estimate the variability of the underlying demand.

Calculate Inventory Components

IO_DETERMINISTIC

Calculate target inventory components

The Calculate Inventory Components algorithm calculates inventory components (that is, the types of inventory that constitute the total inventory for a given item). By delineating what type of inventory exists in the supply chain, more granular inventory optimization calculations can be made.

Figure 7 shows the assigned planning operator for planning area UPA. Here the selection of the STATFORECASTING check box under Planning Operators means the planning operator is assigned to a planning area.

Figure 7

Assigned planning operators for planning area UPA

Ensure that your supply chain model is set as per the business requirement and that planning objects are active. For example, the planning area needs to be in active mode. In your user ID, the roles of S&OP planner and inventory planner have been assigned with the required supply chain data model setup done by you for the business process. Now you are ready to execute the planning process S&OP with inventory review.

The SAP Integrated Business Planning, add-in for Microsoft Excel provides the Microsoft Excel user interface (UI) for SAP Integrated Business Planning. Installation of the SAP Integrated Business Planning, add-in for Microsoft Excel is a one-time activity. Use the latest version of the add-in. Once it is installed in Microsoft Excel you are able to get the new IBP tab. Accessing the SAP Integrated Business Planning, add-in for Microsoft Excel requires an SAP Integrated Business Planning authenticated URL. It is provided by SAP for the organization as a tenant of SAP Integrated Business Planning on Cloud and the planning area setup of the business process. In my example, the planning area to be used for connection settings is UPA for logging in and accessing the SAP Integrated Business Planning, add-in for Microsoft Excel.

Note that I assigned the planning operators listed in Tables 3 and 4 for planning area UPA, which is later to be used for simulating and executing the planning process.

You need authorization for executing these planning processes. As I have an authorization to execute them after my successful login to the SAP Integrated Business Planning, add-in for Microsoft Excel for planning area UPA, the SAP Integrated Business Planning Excel ribbon appears with various sections or groupings, such as Planning View, Data Input, Alerts, Master Data, Scenarios, and Advanced. Authorized planning operators are listed in the ribbon under the Advanced grouping head (Figure 8).

Figure 8

Authorized planning operators listed in the ribbon

If I do not have authorization to the SAP Integrated Business Planning add-in for Microsoft Excel, I would not able to view the planning operators listed under the Advanced section that are not assigned to my user ID under the Advanced section. I would not be able to execute those planning algorithms assigned under the planning operators.

Planning Process

Planning process execution is done in the SAP Integrated Business Planning, add-in for Microsoft Excel. View it in the planning workbook that is set up for the planning area. Use a copy of SAP standard planning workbooks as a base and then change the key figures and attributes as required. The Microsoft Excel workbook data sheet is used for viewing, changing, editing, calculating, and executing the planning algorithms.

Microsoft Excel is connected to the SAP HANA database, which ensures a fast update and simulation of what-if scenarios.

(Note: I am covering the S&OP Inventory review process, which is part of the full S&OP planning process. The demand review is complete and now I am at the next process, which is inventory review. These process steps validate the data input, run-execute inventory optimization algorithms, analyze the output of the inventory optimization algorithms, perform a simulation, and finalize the optimized inventory levels and inventory plan. In this section I cover each process step in more detail.)

Step 1. Validate Data Inputs in the Excel Add-In

Log on to SAP Integrated Business Planning, add-in for Microsoft Excel. The IBP tab is visible in Microsoft Excel in the active ribbon.

The Favorites option appears under the Planning view section. After you click Favorites, SOP Inventory and other options, such as Add and Update, appear. After you click SOP Inventory, new options appear on the screen with the list of planning workbooks. In my example, the planning workbook is SI-20 Inv Planning Results. Click this link to view the planning workbook details with data.

Planning view SI-20 Inv Planning Results loads on the screen to show the planning book details of the SI-20 Inv Planning results (Figure 10).

Figure 10

Planning Workbook SI-20 Inv Planning Results

Review the inventory input data in the planning book. The inventory planner reviews the values of the input key figures, such as Demand Forecast, Demand Forecast Error CV, Target Service Level, Transporation Lead Time, and Transportation Lead Time Error CV.

Step 2. Run the Inventory Optimization Algorithm

In the Advanced group in the SAP Integrated Business Planning, add-in for Microsoft Excel ribbon, follow menu path Inventory Optimization > Run. A dialog box appears. In the dialog box, in the Planning Operator section select the radio button for Global (multi-stage) inventory optimization. In the Scenarios section select the Baseline check box. In the Versions section select the Base Version check box. Click the Next button (Figure 11).

Figure 11

Select parameters for an inventory optimization run

After you click the Next button, a screen appears in which you select the Reason Code (Figure 12).

Figure 12

The Inventory Optimization run with the Reason Code and Run Inventory Optimization algorithm

In Figure 12 select the check boxes that are relevant to your process (for example, Inventory). In the Comment box enter a comment for an inventory optimization run. Click the Run button and the IBP: Information box appears (Figure 13). The IBP Information box appears to give information about the inventory optimization run. Click the OK button to execute the inventory optimization run.

Figure 13

The Inventory Optimization run information box

After you click the OK button the IBP Information Box disappears.

Check the status of the inventory optimization job. Click Inventory Optimization in the Advanced tab on the IBP ribbon and from the drop-down list click Status (Figure 14). (In Figure 14, the Advanced tab is overlapped by the Inventory Optimization drop-down list. After you click the Inventory Optimization option, the list appears and in that list one of the options is Status. After you click the Status option, the Advanced tab is next to the Version tab on the IBP ribbon.)

Figure 14

Inventory Optimization status on the Excel IBP ribbon

The inventory optimization job Sstatus box appears. The job has the status of Completed (Figure 15).

Figure 15

Inventory Optimization job status

Click the Completed hyperlink in Figure 15 and the job log appears on the screen (Figure 16).

Figure 16

Inventory Optimization job log

Step 3. Analyze the Results of the Inventory Optimization Run in SAP Integrated Business Planning, Add-In for Microsoft Excel

An inventory planner does the analysis of the results. If any problem is found, then the planner goes to a more detailed level.

The inventory planner adjusts the various inputs—for example, to see the effect of a demand side change on Demand Variability Safety Stock by adjusting the demand forecast or the demand forecast error CV. Instead of working on the demand forecast (Demand forecast error CV percentage change), it is also possible to reduce the target service level and achieve the recommended safety stock in some industries. In some industries the service level is a predefined contractual obligation that cannot be violated without incurring high penalty costs. In these industries it is normally easier to reduce the demand forecast (demand forecast error CV percentage). For the supply side check the transportation Error CV, (Transportation Lead time).

With the adjusted key figures a simulation is started to see if the safety stock requirements are met.

In the IBP Planning tab click the Favorites tab and then follow menu path SOP Inventory folder > Planning Work books. From the drop-down list select SI-20 Inv Planning Results. Details of the planning view appear on the screen. Make the adjustments in the filter and do following entries:

Location ID: LA_Plant, LA_DC1

Product Family: LA

Product Description: LA_PRD1

Increase the Demand Forecast for current weeks 23, 24, and 25

The value of the demand forecast changed for the simulation of the inventory optimization (Figure 18).

Figure 18

Changing the Demand Forecast for weeks 23, 24, and 25 for a simulation of Inventory Optimization

Click the Global (multi-stage inventory optimization) option. An information dialog box appears indicating that the system is running. Once the run is finished the planning book is refreshed and shows the simulated results (Figure 20).

Similarly you can simulate for service level safety stock by adjusting the Target Service Level. Supply Variability Safety Stock will change when the Transporation Lead time (Transportation Lead Time Error) is adjusted.

A global inventory optimization run also calculates Cycle Stock, Pipeline Stock, On Hand Stock, and Average Inventory Position for component levels at various locations. Planning Book SI-40 Inventory Components Rev shows the details of components at various locations.

Step 6. Finalize the Inventory Planning Result

After validating the inventory level, the inventory planner finalizes the inventory planning data that would be input for the next step of the S&OP planning cycle, which is supply review.

Tips and Tricks

If an inventory optimization job has been set as an error and the error log details do not give the details of the reason, as shown in Figure 23, it is difficult to understand the error. In that case run the S&OP heuristic algorithm in simulation mode. In the log you can see the error and take the corrective action. Most of the time the error is due to the master data setup. Recheck the master data and correct it.

Figure 23

Errors found in the inventory optimization log

SAP Integrated Business Planning is open for doing any changes and simulating the result in the SAP Integrated Business Planning,add-in for Microsoft Excel. While making any change do not by mistake overwrite any key figure data that is editable and save it.

Data modeling is the most challenging process in SAP Integrated Business Planning. Copy the SAP Integrated Business Planning delivered planning models and make minimum changes based on the business requirements of your organization. Every quarter a new release comes and you will have less of an impact while upgrading to new releases.

Understand the logic and use of SAP Integrated Business Planning Inventory Optimization algorithms before running them. That helps the inventory planner in doing the analysis of the inventory results.

Business Benefits

The business benefits include:

Efficiently position inventory to respond to uncertain demands and supply

Optimize inventory levels

Visualization of the supply chain and the impact of forecast error, lead times, replenishment frequency, and lot sizes

Consistent information and one source of truth for data across the supply chain

Standard process across the supply chain for inventory-level optimizations

Simulate different scenarios to determine root causes and explore alternatives

Anjali Butley

Anjali Butley has more than 20 years of strong functional, business, and IT experience with domain expertise in supply chain planning and logistics.

She is a business analyst with more than 18 years of SAP experience in design and development of integrated supply chain solutions for large-scale enterprises. Her expertise includes process modeling, business process analysis, application implementations, production support, and presales across multiple client engagements in the SCM domain.